Short Treasuries When US Yields Fall to Low End of Trading Range

New short trade ideas can be initiated if TLT rallies above $125.19, but remains below $128.12. Once you’ve initiated a new short trade, you can use a risk price between $126.68 and $128.12,suggests Landon Whaley, Founder and CEO of Whaley Capital Group.

The iShares Barclays 20+ Year Treasury Bond ETF (TLT) gained 2.1% in the week ending July 21, despite concerns about the US debt ceiling beginning to percolate. If the US debt limit isn’t increased by the amount established back in March, the Treasury will not be authorized to issue additional debt. This restriction could lead to both delays of payments for government programs and a technical default on US government debt.

While there has been a ton of press about the record low volatility in the equity market, volatility has been historically compressed across all asset classes. US Treasury volatility, as measured by the Merrill Lynch MOVE Index, is trading at the lowest levels ever across one, three and six-month durations.

Volatility won’t stay compressed for long against a back drop of US policy uncertainty. When volatility explodes higher, it will be bearish development for US Treasuries. US yields sold off last week to the lowest level in three weeks and it’s providing us with a good opportunity for a short trade in long-dated Treasuries.

There is no better time to short Treasuries than when US yields fall to the low end of a reliable trading range. Initiating a short trade in TLT now puts a tailwind at our back and improves the reward-to-risk of the trade idea.

Trade Idea: New short trade ideas can be initiated if TLT rallies above $125.19, but remains below $128.12.

Once you’ve initiated a new short trade, depending on your entry price and how much room you want to give this trade to move around, you can use a risk price between $126.68 and $128.12.

The risk price line in the sand is $128.12. If TLT closes above this price, then my short bias has been called into question, from a quantitative perspective. If this occurs, you should close all open short trade ideas.

From a profit perspective, if this short trade moves in your favor, you should book profits if TLT declines to the $123.10 to $122.19 area.